Treasury bears: Keep towel in hand, but don't throw just yet

Confession Time: This morning on the train ride in looking at current and o/n price action, I took towel in hand thinking despite overwhelming technical deterioration, usfi appears unwilling to do anything but grind higher. Some conciliatory remarks out of Moscow may have reduced the haven bid and the biggest reason to own Treasuries. More recently, Unit Labor Costs mark the greatest jump (4.2%) since Q4 ’12, but Treasuries are not coming lower still following that release.
 
 
Following the extremely disappointing 0.1%, Q1 GDP market participants have every reason to expect a message that the Fed will stand ready to do all that is necessary to achieve its maximum employment mandate. As such, we might expect the market has already priced in such expectations.
 
Technically, the market still trades weak. There has been no lasting recovery of price declines on Friday. The intra-session recovery on Friday is insufficient to suggest a bullish backdrop. The bullish contingency simply failed to carry the day to a higher close.
 
Since then, price action has made three attempted advances, including overnight. None has yet to hold.
 
Position takers might consider the data that is provided in the 9 days of remaining life for short-dated May Eurodollar options:
  • May 8; Claims tomorrow - Continuing Claims (bbg survey est 2758k v. 2771k last) reached a 6+ yr low 2 wks ago
  • May 9; JOLTS Job Opening (4173 last) highest since late ‘08
  • May 9; Wholesale Inventories (bbg est +0.5 v. last +0.5) . Inventory adj accounted for roughly -0.6% to Q1 GDP
  • May 13; Retail Sales (Control gp) last month 0.8% adv greatest since January ‘13
  • May 14; PPI x f&e, Last month, greatest MoM gain since Mar ’11 and rebounding YoY best since Oct ‘13
  • May 15; CPI x f&e MoM last +0.2% highest since Feb ‘13
  • May 15; Another Claims number
  • May 15; Industrial Production, 2 mo ago largest gain since May ’10, last mo gain 2nd best in a year
  • May 15; Cap U last mo (79.2%) rises to highest since May ‘08
  • May 15; Philly Fed, languished until Feb, rebounded over 20pts last 2 months
  • May 16; Housing Starts, Permits – Permits expected near Oct ’13, 7+yr high
  • May 16: Uof Mich Consumer Sentient – last mo highest since jul ‘13
There are also several other regional Fed reports as well as a number of speeches. Tomorrow is a big Fed speech day to include Plosser, Evans, Tarullo, Yellen (again) and Bullard. On or before May 16th with Fisher, Kocherlakota, Lockhart, Plosser, Lockhart (again), Lacker, Yellen and Bullard.
 
Eurodollars do not have to stay where they are. There are inexpensive 9 day options. Green Eurodollars have become the fulcrum and a change in sentiment will be reflected there.
 
Consider:
Green May (9 day) 98.25 Put; -.30 delta. Quote: 2.5/ 3
Greem May (9 day) 98.125 Put; -.08 delta. Quote: 0.25/ 1
Greem May (9 day) 98.375 Call; +.36 delta. Quote: 2/ 3
Green May (9 day) 98.50 Call; +0.8 delta. Quote: 0.25/ 0.5
I like Puts and Put Spreads, but can understand someone wanting to buy strangles.
 
About the Author

Martin McGuire, managing director at TJM Institutional Services

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